Global financial market reaction to US military action and oil price changes

On Monday, U.S. stocks rose, while oil prices fell. The market's reaction reflected expectations that Iran would not seriously disrupt the flow of global crude oil. Especially after the U.S. intervened in the conflict between Israel and Iran, investors realized that if the global supply of crude oil was disrupted, in addition to the negative impact on the global economy, this situation would not be beneficial to Iran's own economy.

First, the S&P 500 rose 1%, recovering from the previous week's sharp fluctuations caused by concerns about escalation of the conflict. The Dow Jones Industrial Average rose 374 points, or 0.9%, while the Nasdaq Composite Index also rose 0.9%. It is worth mentioning that after the opening of the market on Sunday night, oil prices rose by 6% at one point, which showed that investors reacted to the U.S. bombing for the first time and market concerns intensified.

However, as the market's attention shifted from the U.S. military action to how Iran would respond, oil prices quickly gave up all the gains and fell sharply. On Monday night, the U.S. benchmark crude oil price once exceeded $78 per barrel, but soon fell back and finally closed at $68.51 per barrel, almost back to the level before the outbreak of the war, when oil prices were slightly above $68 per barrel.

Secondly, behind the fluctuations in global oil prices, Iran's military actions have also exacerbated market uncertainty. On Monday, Iran announced a missile attack on Qatar's Al Udeid Air Base used by the U.S. military, a move that further increased losses. Iran said that the number of retaliatory bombings on nuclear facilities was comparable to the U.S. air strikes last weekend, and it may be a signal that Iran is trying to ease the conflict. However, most importantly for financial markets, Iran's retaliatory actions did not target global oil supplies. During the conflict between Israel and Iran, the market's biggest concern was that Iran might take measures to restrict global oil supplies, thereby pushing up oil prices and related refined products.

It is worth noting that Iran is one of the world's major crude oil producers and may restrict global oil flows by blocking the Strait of Hormuz. The Strait of Hormuz is a key waterway for global oil transportation, and about 20% of oil demand is transported through the strait every day. Although some analysts believe that Iran may not close this important waterway because Iran itself needs to export oil through this strait, it cannot be ignored that Iran still needs to earn income through oil exports, so this move is crucial to its economy.

Nevertheless, the market generally hopes that the conflict between Israel and Iran can be controlled as soon as possible, believing that this will only be a short-term military action. Optimism believes that a strong response from the United States may force the conflict to end as soon as possible, thereby avoiding long-term impact on the global economy. This expectation has prompted investors not to rush to overreact and continue to wait and see, especially when Iran's future actions are still unclear.

In addition, another factor affecting the market is the policy dynamics of the Federal Reserve. The Federal Reserve has not made a decision to cut interest rates recently because the agency wants to observe the actual impact of the Trump administration's tariff policy on the US economy and inflation. Although inflation has remained at a relatively mild level recently, rising oil and gasoline prices may put some upward pressure on inflation. This may lead the Federal Reserve to keep interest rates unchanged in future decisions, because although rate cuts can stimulate the economy, they may also push inflation further up.

Finally, in the bond market, Federal Reserve Governor Michelle Bowman said she would support a rate cut at the next Fed meeting as long as "inflationary pressures are under control." As a result, U.S. Treasury yields fell. Specifically, the 10-year Treasury yield fell to 4.33% from 4.38% last Friday, while the two-year Treasury yield fell to 3.84% from 3.90%.

In summary, global financial markets have shown strong volatility under the influence of geopolitical tensions. Although the conflict between Iran and Israel has increased market uncertainty, optimism still dominates, and investors generally believe that the conflict will not affect the global economy for a long time. This sentiment has driven the rise of U.S. stocks, while also prompting oil prices to experience sharp fluctuations.